Week 3 - Financial Statements.pdf

1203106 CORPORATE FINANCE WEEK 3 FINANCIAL STATEMENTS TABLE OF CONTENTS 1 BALANCE SHEET 2 INCOME STATEMENT STATEMENT OF 3 CASH FLOWS BALANCE SHEET The balance sheet is an accountant’s s...

1203106 CORPORATE FINANCE WEEK 3 FINANCIAL STATEMENTS TABLE OF CONTENTS 1 BALANCE SHEET 2 INCOME STATEMENT STATEMENT OF 3 CASH FLOWS BALANCE SHEET The balance sheet is an accountant’s snapshot of a firm’s accounting value on a particular date. It states what the firm owns (assets) and how it is financed (liabilities and stockholders’ equity). The accounting definition that underlies the balance sheet and describes the balance is: Assets = Liabilities + Stockholders’ equity  รายการ รเ ยบเ าเ cashe ke year change in ①+ 8 = Total liabilitie +4 -> = ① -> น าคงค # >1 yea าง > ( PP& E & - ท - & = -=> = ค้ สุ ฉ่ ที งิ สิ ท่ ค้  Accounts Receivable ↓ ↓ Money, > l table -> in the Future #tory, 1. Raw Materials a. Work in proces 3. Finished goods raw Materials & ier #any productio ↓ @ work in ③ Finished goods process -> 9 Products) Depreciation - าเ ่อมร Buildin million Baht g I 2 10 years -> useful life Depreciation = 100,000 Baht sper year) Beginning % & 4 ⑤ 3 10 year & I & ( ↳ / / I #toorอ ↑ 700,00 500,00 · building's value Baht Account's %payable ↓ Money, -> Pay -> in the future -> supplier cash ค่ สื  เ น น Profit -> ① Dividend -> Owner stock holder 1 million -> 500,00 ↳in> new fixed assets retained earning งิ ปั่  ASSETS AND LIQUIDITY สภาพค อ Liquidity refers to the ease and quickness - with which assets can be converted to cash without significant loss in value. Current assets are the most liquid and include cash and assets that will be turned into cash within a year. ล่ ASSETS AND LIQUIDITY (CON.) of cas / Accounts receivable are amounts not yet - collected from customers for goods or services sold to them. ④ Inventory is composed of raw materials to be used in production, work in process, and finished goods. ⑧ ③ ASSETS AND LIQUIDITY (CON.) Fixed (non-current) assets are the least liquid assets. 2 Physica Tangible assets include property, plant, and equipment. These assets do not - convert to cash from normal business activity. Intangible assets have no physical - existence but can be very valuable, such as =- patent. trade will, etc. work, good Normal Business Activity SCycle raw material Finished good Her pambots+ #mer > ↓ work in proces  ASSETS AND LIQUIDITY (CON.) interest expense current The% more liquid a firm’s assets, the less likely the firm is to experience problems meeting short-term obligations. ภาระ ก - The probability that a firm will avoid financial distress can be linked to the firm’s liquidity. ผู ASSETS AND LIQUIDITY (CON.) Unfortunately, liquid assets frequently have lower rates of return than fixed assets; for example, cash generates no investment income. To the extent a firm invests in liquid assets, it sacrifices an opportunity to invest in potentially more profitable investment.  LIABILITY AND EQUITY Liabilities are obligations of the firm that require a payout of cash within a - stipulated period. interest expens Many liabilities involve contractual obligations to repay a stated amount plus - interest over a period. -principal mount Liabilities are frequently associated with fixed cash burdens that put the firm in default of a contract if they are not paid. - ( i + ภาระ เ Bankruptcy ( มละลา ล้ Bankruptcy -> ① Sell assets ↓ 1 million * Cash ↓ 700,000 * @ Debt holders 300,000 Stockholders LIABILITY AND EQUITY (CON.) Stockholders’ equity is a/claim against the - firm’s assets that is residual and not fixed. - It is the difference between assets and liabilities. The accounting value of stockholders’ equity increases when retained earnings are added. This occurs when the firm retains part of its earnings instead of paying them out as dividends. lear Building's value Book Value Market value (10- year useful Lifel ( cost - depreciation · 10 million Baht 10 M 10M. - 10 year ↓ -> a million baht / year depreciation supply and demand 1 = 9 M. in the market 1 10 - 1อ Depends on the market · VALUE AND COST The accounting value of a firm’s assets is - frequently referred to as the carrying value or the book value of the assets. ↳ - Under the Generally Accepted Accounting Principles (GAAP), audited financial statements of firms in the United States carry assets at cost. = Market - value, on the other hand, is the price at which willing buyers and sellers would trade the assets. NET WORKING CAPITAL Net working capital = Current assets - Current liabilities. ( Net working capital is positive when current assets are greater than current - liabilities. This means the cash that will become available over the year will be greater than the cash that must be paid out. Current to cash within 1 pear. Debt to pay within 1 year. ! INCOME STATEMENT The income statement measures performance over a specific period. - The accounting definition of income is: Revenue − Expenses = Income If the balance sheet is like a snapshot, the - income statement is like a video recording of what the company did between two snapshots. - -  Beginni End year - 1 / / ↑ ↑ Income statement Balance Sheet Balance Sheet  cash cash non- on non- can y รายไ DirectMaterial (coas)↳= % - Direct labour Overhead. -non- cash (SGRAY Operatio sectio ไ-Non- operating section ด้ INCOME STATEMENT (CON.) The income statement usually includes several sections. The operations section reports the firm’s revenues and expenses from business operations. One number of particular importance is earnings before interest and taxes (EBIT), which summarizes earnings before taxes and financing costs. INCOME STATEMENT (CON.) Among other things, the non-operating section of the income statement includes interest expense and tax expense. The last item on the income statement is the bottom line, or net income. STATEMENT OF CASH FLOWS The statement of cash flows helps to explain the change in accounting cash and equivalents. The three - components of the statement of cash flows are: cush to supplier -> Pay 1. Operating activities salary employe 2.Investing activities - ↓3.Financing activities - & buy & sell fired viabilities & equity - Interest assets -pividend CASH FLOW FROM OPERATING ACTIVITIES To calculate cash flow from operating activities we start with net income. We now need to add back non-cash expenses and adjust for changes in current assets and current liabilities (other than cash). current current -> ร CASH FLOW FROM INVESTING ACTIVITIES Cash flow from investing activities involves changes in capital assets: acquisition of fixed assets and sales of fixed assets. Buy Acquire ↓ = CASH FLOW FROM FINANCING ACTIVITIES Cash flows to and from creditors and owners include changes in debt and equity. ders End Bond - ↓ < - =- buy back -  liabilitie ④ ② ⑨ ①++ IN-CLASS PRACTICES Company A has current assets of $4,000, fixed assets of $11,000, current liabilities of $1,500, and long-term debt of $6,500. What is the value of the shareholders’ equity? How much is net working capital? Company B has revenue of $250,000, costs of $140,000, depreciation expense of $30,000, interest expense of $20,000, and a tax rate of 20 percent. What is the net income for the firm? Suppose the company paid out $20,000 in cash dividends. What is the addition to retained earnings? ① Assets #selecttilities Assets: Liabilities + Equity -Current assets 4,00 -Current Liabilities 15,000 = Equity + 1,50 + 8,000 + -Fixed debt assets 11,000 - Long- term 6,50 Equity = 1,000 # Total asse 15,000 Total Liabilities 8,00 + Equit 7.000 capital Total l liabilities and total net- working equity 15,00 ↓ NWC = CA- CL =4000 - 158G =$2,580 # · Income - statemen Revenue 250,00 - costs 140,00 - Depreciatio 30,00 - Interest expense 20,00 Pretax income 60,00 - Tax 20% 60,000 x 0.2 = expense 12,00 (20% Net income 10,000- 12,000 - $48,000 # - - Dividend 20,00 -Addition retained earning s28,000 # IN-CLASS PRACTICES (CON.) Company C has cash flow from operating activities of $50,000, acquisitions of fixed assets of $20,000, sales of fixed assets of 5,000, long- term debt retirement of $20,000, and dividend payment of $10,000. What is the cash flow from investing and financing activities? How much is the change in cash?  8 statement of Cash flow cash flow from activities Operating 50,00 cash flow from investing activitie of -Acquisition fixed asset -20,00 + -sales of fixed asset + 5,00 ~- 15,00 Cash flow from financing activitie -Retirement of long- term debt -20,00 + -Dividend -10,00 -30,00 in Change cash 50,000 - 15,000 - 30,000 5,000 # Q&A